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Frontier markets up 7% over the last year, says Vodia

Vodia Group has released a new report covering trading and custody in frontier markets. The report reveals that the frontier markets are up 7% over the last year, compared to -23% for developed markets and -10% for emerging markets. Africa is up 24% for the last 12 months.

According to Vodia, over the last 36 months the frontier markets have averaged a 28% correlation to the S&P 500. While global asset managers are looking to the region with a new interest. Vodia estimate that it will take another 15 years for frontier markets to reach the current level of development as emerging markets.

The frontier markets now hold the last truly uncorrelated stock exchanges and these markets are still driven not by international capital flows but by local companies. There are 56 nations with operational stock exchanges beyond emerging and developed markets.

While some of these countries' exchanges can not be reasonably accessed due to their limited liquidity and undeveloped regulatory environments, as a group they are large and growing. The S&P Frontier Markets Index of 24 exchanges has a combined GDP of US$2.1 trillion and a population of 476 million. Their population is younger than emerging and developed markets and GDP growth has averaged 5.4% annually since 2000.

Highlights from the report include:

Frontier African exchanges have been growing rapidly driven primarily by local investor interest, with total market cap expanding 480% between 2000 and 2006.

Local broker fees vary widely across frontier Africa, with a range between 1% and 4% of the value of the transaction. Fees are tiered by lot size or mandated by the government.

Trading turnover in frontier Africa has risen from US$635 million in 2000 to $5.3 billion in 2006. Liquidity remains heavily concentrated in the top 50 most traded equities.

Vodia estimate that frontier markets will reach the current level of development of emerging markets in 15 years, with electronic access, developed securities servicing and full prime brokerage coverage.

The report reviews trading and research in 13 frontier African markets primarily in sub-Saharan and West Africa. For investors wanting broad exposure, ADRs/GDRs, swaps, and several new ETFs traded in the US and Europe offer simple access. For serious investors, the best routes to market are through continent-wide brokers with local partners. Africa is not for the faint of heart however; costs are high, liquidity is low and stock prices fluctuate based largely on local conditions. 

Custody and central securities depositories in Africa are growing. Nine frontier African markets currently operate central securities depositories with two more in the planning stages. Custody, a latecomer to these markets, is finally taking shape: a major custodian recently rolled out the first single point of entry system covering most of the continent.

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